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On the Money Channel TV

I had three subjects that I touched upon during the show. My sparing partner was Lucian Isar, also former banker.

First, I talked about the importance of transparent liquidity management by the central bank, NBR. There is a big concern throughout the Romanian society, in my view a bit exaggerated, that lending is not picking up in the economy. There are arguments on both sides, demand and supply. But last night I wanted to point to the cost of credit as it is influence by the money markets.

The main problem that banks have to deal with when it comes to cost of credit is the big range in which the price of short term liquidity can move. Currently with key rate at 6.25% the price of short term liquidity can vary from 2.25% to 10.25%. Too much volatility to handle under current global economic conditions.

There is simple solution. Keep money market rates close, just below or above, the key policy rate. This way it offers transparency and some predictability to the banking sector which will lead to lower credit costs.

I know NBR uses money market rates to influence the foreign exchange market. But doing what I am saying should not come against this strategy. If the central bank cares about FX market more than inflation, in the short term, and it wants to fend off appreciation pressures all it has to do is to cut the key rate. Then keep money markets around. I am not questioning here the monetary policy decisions, ( I will publish an analysis over the week-end), just the way monetary policy is implemented.

The second point I made is also expressed here about current policy changes need to make it to the other side of the crisis period. I want to go a bit further.

The current costs of restructuring the Romanian economy and the cost of investing today, especially on big infrastructure projects, should be at least partially transferred to future generations through long term borrowing. In this way we allow current generation to still consume and keep the standard of living at least at the current level. And is not only costs that we transfer to future generations. By slimming the public sector of 50% of employees we leave them also a more efficient government which should allow for a long term yields to remain low for long periods.

In the same time lowering current income and profit taxes together with lower social contributions should lead to investment, domestic and foreign, and further to job creations.

Finally I talked about my view that currently banking sector resembles an oligopoly in Romania. Lucian had good point here that first 5 banks in the system represent 80% of the market.